Assignment File

Assignment 2
Due date: 28 June 2013 This assignment carries 50% of the mark for the course. Answer ALL the questions. Total marks: 100 Relevant diagrams are highly recommended. 1 a What is the difference between the short run and long run? Why does the amount of time needed for moving from the short run to the long run vary among different firms? (7 marks) Most of the firms regard labour costs as variable costs. But why do most book publishers regard labour costs as fixed costs? Explain. (8 marks)

Suppose the total cost of producing 10,000 tennis balls is $30,000, and the fixed cost is $10,000. a b Calculate the variable cost. (3 marks)

When output is 10,000, what are the average variable cost (AVC) and the average fixed cost (AFC)? (4 marks) Assuming that the cost curves have the usual shape, calculate the distances, in terms of dollars, between average total cost and average variable cost when the output levels are 10,000 and 30,000. Why are the distances different at the two output levels? (8 marks) At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit of output it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firms marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. i ii Is the firm maximizing profit? Why? (3 marks)

What is the firms current profit? Show your steps of calculation. (5 marks) (5 marks)

iii What is likely to occur in this market and why? b i

A student of ECON A231 argues: To maximize profit, a perfectly competitive firm should produce at the output level where the difference between marginal revenue (MR) and marginal cost (MC) is the greatest. Any production beyond this level will reduce the profit made on each additional unit. Agree or Disagree? Explain with a diagram. (7 marks)

ECON A231 Introduction to Microeconomics

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Another student of ECON A231 argues: The economic model of perfectly competitive market is very unrealistic because it predicts that firms in a perfectly competitive market earn zero profits in the long run. However, in reality, no firm would stay in business if it earned no profits. Agree or Disagree? Explain. (5 marks)

If a monopolist can find a way to reduce his marginal costs, he will not lower down his price. Because he is a monopolist, with lower marginal costs, he can keep the price and quantity unchanged to increase his profits. Agree or Disagree? Explain with a diagram. (8 marks) Suppose a baseball manufacturer has acquired a monopoly on the production of baseballs, and faces demand and cost situation as follows: Price Quantity (per week) $20 19 18 17 16 15 i 15,000 20,000 25,000 30,000 35,000 40,000 Total Marginal Total Revenue Revenue Cost $330,000 365,000 405,000 450,000 500,000 555,000 Marginal Cost

Reconstruct the above table in your answer sheet and fill in the table. (9 marks) If the firm would like to maximise profits, what price should it charge and how many baseballs should it sell? How much profit will it make? (6 marks)

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iii Suppose the government now imposes a lump sum tax of $50,000 per week on baseball production. Now what price should the firm charge and how many baseballs should be sold? What is the amount of profits after tax? (7 marks) 5 a HP and Dell are two of the biggest suppliers in the global PC market. They can choose either to cut price or hold the price unchanged. Refer to the following payoff matrix. The first entry in the bracket is the payoffs (in $million) of HP and the second entry is the payoffs of Dell. What is the dominant strategy of HP? What is the dominant strategy of Dell? Explain your answer. (8 marks)

Assignment File

Dells strategies Cut price HPs strategies Cut price Hold price b (+5, +20) (-20, +40) Hold price (+10, -10) (0, 0)

Explain how collusion makes firm better off. Given the incentive to collude, discuss two reasons why some firms cannot successfully form a cartel. (7 marks)